For investors, the war between Herbalife (HLF) and Pershing Square’s Bill Ackman has been equivalent to a ride on the Vomit Comet.
There is an investing lesson here … and it’s an important one, albeit an ugly one.
Let’s look at what each side has done right and wrong, then we’ll examine the effects. I am not taking any position regarding accusations against Herbalife. This is simply PR analysis.
Ackman’s PR offensive against Herbalife had two goals in mind:
- Get the government to investigate the company.
- Get the stock to crater.
It has been somewhat successful. Ackman has taken the same approach my firm, Asymmetrical Media Strategies, would have taken had we been the PR adviser. Ackman has attacked Herbalife as a pyramid scheme. He has presented evidence that has convinced many investors and institutions.
He has set up websites and social media that attack Herbalife with consistent negative language — repeatedly using “pyramid scheme,” “Ponzi,” “fraud” and other buzzwords designed to frighten investors and create smoke around the company. His strategy got the government involved. The DOJ, FBI and FTC are investigating Herbalife.
And yet, as it stands, HLF stock sits higher than when Ackman began.
Why? Because he’s not telling a clear story.
Most people don’t know the difference between a pyramid scheme and a legitimate multi-level marketing (MLM) operation. That’s why Ackman should explain this difference repeatedly. That is his narrative. Every story must connect directly back to this main narrative, or people will lose the thread. And that’s exactly what happened as Ackman dumps exhaustive presentations instead of sticking to the story.
He also erred tactically. By replacing his short position with a time-sensitive put option position, he was forced to over-hype the presentation, then whammied himself by failing to deliver. Investors don’t care if Venezuelans aren’t becoming successful Herbalife distributors, and the nutrition club angle was not directly tied to his main narrative.
Ackman’s fatal flaw is that he didn’t tell a simple story. The market showed him why that’s important.
Herbalife came to the PR battle too late, and was silent for too long. This gave Ackman a running start. Now Herbalife has piled on the PR firms, and they are doing only one thing right: demonizing Ackman.
Were Asymmetrical advising Herbalife, we would counsel the company to continue that attack. Plenty of folks on Wall Street dislike Ackman (there’s a reason Carl Icahn took a long position), so encourage people to go long as a method of driving schadenfreude.
Herbalife should paint Ackman as a rich hedge fund manager trying to profit off short selling, telling lies about the company and using his monied influence to get the government involved.
This offensive approach is essential. Too few companies engage in this strategy; instead, they lose on defense. That’s why the payday loan industry is being eviscerated by the federal and state governments. Payday lenders don’t want to “inflame” the CFPB or DOJ.
Apparently they don’t see the wisdom in the phrase, “You do not negotiate with terrorists.”
Herbalife, however, does need to play some defense, if only to save reputation. HLF must come out with its own slide presentation — I’d suggest doing so with lots of theatrics, and lampoon the way Ackman does his presentations, right down to having 75 slides that only say “blah blah blah.” (Ridicule is another Alinsky tactic that scores big.)
However, the presentation must focus on why Herbalife is not a pyramid scheme. Address the accusations. Why not — assuming that the company is a legit MLM operation?
The other thing Herbalife should do is produce two short documentaries and one short animated film. The first documentary should show successful regular people as HLF distributors. The second should be a hatchet job on Ackman, showing how he cratered JCPenney and “stirs up trouble.” The animated film should be two simple minutes demonstrating how and why Herbalife is not a pyramid scheme.
The long-awaited payoff: How does this matter to investors?
There’s a time and place for federal investigations. If you hold a position in any stock and a large hedge fund takes a short position, you need to be wary about holding the stock. Don’t hold it out of pride.
The truth is that, right or wrong, a rabble-rousing, gadfly of a short seller may influence the government to get involved and that’s going to take your investment away from the track it was on. That’s not always the case. It’s just with the higher-profile managers.
You invest because of earnings and long-term story. Something like this disconnects the stock price from the company’s value. You’ll have to sit out months of volatility and hedge fund managers moving your stock.
My suggestion: Move on. Move on when it comes to HLF, and move on when it comes to any similar situation in the future.
You might miss out on a huge upside move if the clouds dissipate, but you might also find that the short-seller was right … and that he has saved you a lot of money.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.